Underproductive Property and Delayed Income

Underproductive Property and Delayed Income

Article excerpt

Occasionally, an estate or trust may hold what is deemed to be underproductive property. This is defined as a principal asset that has not yielded an annual return of at least one percent of its inventory value for more than a year. Special rules apply in regard to the proper fiduciary accounting and fiduciary income tax treatment of the proceeds realized upon the sale of such property. In New York State, the Estates, Powers and Trusts Law (EPTL), Sec. 11-2.1 (k), deals with this situation.

According to this statute, a portion of the net proceeds of a principal transaction, the property of which has not produced an average net income of one percent per annum, is treated as delayed income to which the income beneficiary is entitled. Excluded from this provision are securities that are listed on national securities exchanges or that are traded over the counter.

Net proceeds is defined as the gross proceeds less any expenses incurred by the transaction, including capital gains tax and any carrying charges that were paid during the underproductive period. The amount allocated as delayed income is the difference between the net proceeds and an amount which, had it been invested at five percent simple interest per annum, would, together with the interest, equal the net proceeds. This amount, plus any carrying charges and expenses that had been charged to income during the underproductive period, less any income or value received by the beneficiary from the underproductive property, is the income distributable to the beneficiary, and the balance is principal.

The following example will serve to illustrate the computation of delayed income:

Assume a principal asset that was sold for $3,000,000 and had an underproductive period from January 1, 1992--November 1, 1993. The carrying charges during the underproductive period were $10,000, and the capital gains tax on the sale of the property was $140,000. …